How Do Balance Transfers Work?

How Do Balance Transfers Work?

Have you ever experienced at certain months when all your expenses suddenly crash at the same time. Then to ease your cash-flow, you turn to your credit card for help — which could very well mean maxing out your limit, putting you in an even deeper hole than before!

With the high interest rates credit cards charge, it is easy to lose control of your expenses. To guide you with this problem, here are some tips to help you pay your credit card debt before it turns into a catastrophe.

One awesome way to untangle yourself from intimidating credit card debt is through taking advantage of balance transfers.

What is a balance transfer?

As the name suggests, balance transfers allows you to move all outstanding balances from one, or more credit card accounts into a new one, typically with a lower interest rate, fewer penalties or other perks. The main benefit of this is that it lets you pay off your debt in fixed amounts monthly at greatly reduced interest rate, similar to paying off a loan.

So if you’re paying for one card that teeters near the edge of your credit limit, paying for multiple credit cards at once or just struggling to clear off your bills, you can save hundreds of pesos simply by transferring your payment into another credit card and better manage your debt.

Rates vary depending on the bank and how long you plan to pay. These can range from 6% to 18.79% per annum. Citibank for example, charge 11.88%, Metrobank charge 8.16%, BDO charge 13.04%, and BPI charge 12%.  Make sure to compare rates and ask for other fees involved in the transfer, especially if you’re transferring an account from another bank before proceeding. You can check credit card balance transfer rates of other banks first, just to be sure.

How do you calculate a balance transfer?

Always do the math first to see if you’re REALLY getting a better deal with a balance transfer. While the lower rates might seem attractive at first glance — and most of the time they are — banks may have put limits on how much you can transfer per account among other fees, which can quickly negate whatever savings you may have. Ask the bank to help you compute for your monthly amortization if you must.

Using the tables below as an example, let’s say you want to pay off P30,000 of your credit card debt with a 0.99% interest rate per month (11.88% per annum) , and pay it off for 12 months.

Tip:
Banks often provide a factor rate so you can easily compute your monthly amortization. Factor rates are derived or simplified from the formula used to calculate your monthly amortization. To simplify the computation, you multiply your base amount with the factor rate. To compute for the factor rate, you add the monthly rate, with the quotient of one divided by the term selected. Using the same figures as above, to calculate for the monthly amortization, P30,000 x (0.99% + (1 ÷ 12 months)) = P2,797 per month!

With a balance transfer, you pay off equal amounts of P2,797 for 12 months. For comparison’s sake let’s say you settle your credit card in a similar manner: paying in equal amounts of P2,797 until you pay off the balance of your debt. Let’s also assume that you don’t charge any additional expense to your credit card until you’ve completed your payments.

Using Balance Transfer
MonthsOutstanding balance after balance transferInterest chargesMonthly interestMonthly repayment
130,000.00297.000.99%2,797.00
227,500.00297.000.99%2,797.00
325,000.00297.000.99%2,797.00
422,500.00297.000.99%2,797.00
520,000.00297.000.99%2,797.00
617,500.00297.000.99%2,797.00
715,000.00297.000.99%2,797.00
812,500.00297.000.99%2,797.00
910,000.00297.000.99%2,797.00
107,500.00297.000.99%2,797.00
115,000.00297.000.99%2,797.00
122,500.00297.000.99%2,797.00
Using credit card
MonthsOutstanding balanceInterest chargesMonthly interestMonthly repayment
130,000.001,050.003.50%2,797.00
228,253.00988.863.50%2,797.00
326,444.86925.573.50%2,797.00
424,573.42860.073.50%2,797.00
522,636.49792.283.50%2,797.00
620,631.77722.113.50%2,797.00
718,556.88649.493.50%2,797.00
816,409.38574.333.50%2,797.00
914,186.70496.533.50%2,797.00
1011,886.24416.023.50%2,797.00
119,505.26332.683.50%2,797.00
127,040.94246.433.50%2,797.00
134,490.37157.163.50%2,797.00
141,850.5464.773.50%2,797.00

Just browsing through the tables you can immediately tell that even though you’re paying the same amount of money per month, with a balance transfer you’ll be able to settle your debt (2 months) sooner. Not only that, the lower interest rate means you’ll be saving P4,712.30 (from the example above)!

And finally, let me ask you, which table looks more manageable and easier to control?

balance trans - calculate

Things to remember

Balance transfers also have their limits. For one, terms set by banks are non-negotiable. Unlike credit cards where you can set to settle your debt in let’s say four months, you can’t do the same with a balance transfer. Typical terms are counted per three months: 3, 6, 9, 12, 18, 24 months.

Balance transfers are also more strict with payments. In case you have extra money and you want to settle the remainder of your debt, this may be harder to do with a balance transfer. And even missing one may mean automatic cancellation, and you would be slapped with penalties such as termination or cancellation fees. So be sure to read the terms and conditions carefully before giving the go ahead signal.

Also, you normally need to have a good credit standing to be approved of a balance transfer. So it’s more of a preventive measure than an actual solution, unless you’ve spotted the problem early on.

But once you do, and conditions are in your favor, then it’s a good tool to have in your financial arsenal.

If you don’t own one yet, we can help you find a credit card that suits your lifestyle!

 

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